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A divestiture is defined as the eradication of a portion of a company in order to bolster other areas of profitability, to prevent bankruptcy, or otherwise dispose of an asset(s) that is underperforming.
Divestitures are often viewed as a last resort when a company is floundering. However, divestitures are often what prevent a company’s downfall, if the shift is correctly calculated. A divestiture should be considered as a manner for improving one’s business in order to avert failure rather than correct an already downtrodden company, since the divestiture process can sometimes be lengthy and complex.
Oftentimes, business owners choose to divest due to the following scenario: The business owner became occupied with providing all resources for their client base, lost sight of the original product, and wound up producing a few, average commodities instead of one outstanding product or service.
On the other hand, a divestiture might come from a previously acquired business that the strategic buyer finds unsuccessful and chooses to resell. These are just two of the many situations that may cause a business owner to divest a portion of their company.
Divestitures can be completed through the selling of stock, closing of subsidiaries, liquidations, or the bankruptcy of spin-offs. The process can often complicate the current business operations, so a divestiture must be completed with ample allotted time and staff. Proper planning is vital to a successful divestiture.
Since completing a divestiture can often prove to be a challenging process, it is beneficial to employ an M&A professional that can assist in orchestrating the process. Along with the M&A advisor, the seller should also assemble a team of staff members who are able to control factors such as tax complications, accounting, IT, and managerial issues that may be affected by the divestiture. It is important for the business owner to allow for adequate time to smooth over all of these complications, and it may be necessary to hire more staff until the company is once again functioning normally.
One way to ensure that a divestiture is successful is through setting up a staff retention program. The buyer will want to be certain that key staff members will remain after the divestiture, so it is important to set up some sort of program that will secure value for those employees to remain with the divested portion of the company.
It is of paramount importance that customer and vendor relationships be closely managed during the entire process. Oftentimes, affairs such as payments can become lost in the shuffle of the divestiture process, and this will cause both vendors and customers to leave, which in turn will decrease the value of the divestiture.
If you would like assistance in the planning and execution of your divestiture, please contact George & Company. We would be happy to utilize our professional knowledge to help improve your business.